On April 22, 2015, in the wake of persistent criticism during recent prior public engagements with the EB-5 stakeholder community, the USCIS Immigrant Investor Program Office (“IPO”) issued a public statement outlining its interpretation of the EB-5 regulation as it applies to the use of loan proceeds as capital. The new policy represents a significant departure from longstanding EB-5 practice. Many experienced practitioners and scholars view the IPO’s interpretation as starkly inconsistent with the text of the regulations, applicable AAO precedent decisions, binding USCIS adjudications policy guidance, and the intent of the EB-5 statute. Most experienced EB-5 attorneys view the policy as misguided and deserving of vigorous legal challenge. However, this article is not intended to provide a catalog of legal arguments for challenging its validity.[1] Instead, this article will review the likely practical impact of the new policy on present and future EB-5 investors and projects, and it will offer some practical guidance for moving forward. Finally, because the use of loan proceeds as capital may also be affected by legislation recently proposed by Senators Leahy and Grassley (“S.1501”),[2] the article offers an overview of relevant provisions therein and comments on how the proposed changes may further restrict investor options in this area.

The New “Indebtedness” Policy

The new “indebtedness” policy, as articulated by IPO, is as follows:

[P]roceeds from a loan may qualify as capital used for EB-5 investments, provided that the requirements placed upon indebtedness by 8 C.F.R. § 204.6(e) are satisfied. Under 8 C.F.R. § 204.6(e), “[c]apital means “cash, equipment, inventory, other tangible property, cash equivalents, and indebtedness secured by assets owned by the alien entrepreneur, provided that the alien entrepreneur is personally and primarily liable and that the assets of the new commercial enterprise upon which the petition is based are not used to secure any of the indebtedness.”

In order to establish an investment of capital, 8 C.F.R. § 204.6(j)(2) allows a petitioner to submit as evidence, among other items, the following:

Evidence of any loan or mortgage agreement, promissory note, security agreement, or other evidence of borrowing which is secured by assets of the petitioner, other than those of the new commercial enterprise, and for which the petitioner is personally and primarily liable.

USCIS classifies proceeds of a loan that are used for EB-5 investment as indebtedness governed by these regulatory requirements.

When using loan proceeds as EB-5 capital, a petitioner must demonstrate first that they are personally and primarily liable for the indebtedness. That is, they must demonstrate that they bear primary responsibility under the loan documents for repaying the debt that is being used to satisfy the petitioner’s minimum required investment amount.

In addition, the petitioner must demonstrate that the indebtedness is secured by assets the petitioner owns and that the value of such collateral is sufficient to secure the amount of indebtedness that is being used to satisfy the petitioner’s minimum required investment amount. Put another way, indebtedness secured by assets owned by the petitioner qualifies as “capital” only up to the value of such collateralized assets.3

How USCIS is Applying the New Policy in I-526 Adjudications

USCIS is applying the new policy retroactively by denying or declaring an intent to deny I-526 petitions, which, in view of 14-month USCIS processing times, means denial of cases that were filed more than one year ago in reliance on long-settled interpretation of the law. Additionally, for those cases that have had the opportunity to respond with substantive arguments to a notice of intent to deny, to date we have not seen the agency engage in thoughtful or meaningful adjudication responding to the points raised. Instead, we see a pattern of denial that is no more meaningful than “because we said so.” In its April 22 stakeholder engagement, the IPO underscored its unwillingness to engage in substantive discussion of the merits of the policy, declaring that it was simply a clarification of existing law because its own adjudications have been inconsistent.

Based on USCIS actions to date, it is clear that USCIS has decided to stay the course on enforcing the new policy, notwithstanding widespread criticism and the likelihood of litigation.

So, for stakeholders in the EB-5 community, the questions become where we go from here, and what does this new policy mean in practice.

What Stakeholders Should Expect

The bottom line for investors and their counsel is that a denial should be anticipated in cases affected by the change in policy.

Below, we’ll review some of the more common scenarios affected. For now, it should be understood that affected cases will receive a Notice of Intent to Deny, (“NOID”) which has a limit of 30 days for response with no possible extension, as opposed to a Request for Evidence (“RFE”) with a longer, 84-day deadline.

The significance of the shortened deadline is that it reflects the adjudicator’s view that it is highly unlikely that any additional evidence could establish the petitioner’s eligibility on the facts presented in petition. Where there is in fact additional evidence that could speak to the perceived deficiencies in eligibility, the limited 30-day response time can be very prejudicial, particularly where the petitioner resides out of the United States and language barriers are involved. It may be worthwhile to review the June 2, 2013 USCIS Policy Memorandum, PM-602-0085, outlining the circumstances under which a NOID, as opposed to an RFE, is an appropriate agency action. As an initial matter, the likelihood of a NOID underscores the need for proactive evaluation where possible.

The bottom line for projects is that they should expect a spike in denial rates that may last a year or more. Because the new policy is so prejudicial and so clearly at odds with the existing precedent decisions and published USCIS guidance, it is likely that many petitioners will pursue appeals and federal court litigation. Some investors will seek immediate exit from the project. Depending on the terms of the offering, this could result in projects being obligated to provide refunds, or it could necessitate the sourcing of replacement investors. In either event, for the project this means delay. Projects with Chinese investors are already anticipating significant delays in acquisition of conditional residence due to visa unavailability. This additional source of delay will push those dates out still further into the future. The consequences to projects of the spike in denials and resulting delays, whether they relate to availability of funds for job creation, insufficient liquidity for refunds, or long-extended conditional residence periods, will vary from project to project.

Which Investors Are Affected?

The affected classes of investors are those whose source of investment funds is as follows:

• An unsecured loan. Under the new policy, due to the absence of security for the loan which yielded cash proceeds used for EB-5 investment, these I-526 petitions are deemed to have not contributed “capital” to the new commercial enterprise.

• A secured loan, where the collateral was wholly or partially owned by someone other than the petitioner. The reasoning expressed in these decisionshas to do with the petitioner “not owning” or “onlytemporarily owning” the loan proceeds, or notplacing his or her own assets at risk. Experience todate suggests that spousal ownership of the collateral,or a portion of the collateral, is not disqualifying(apparently based on U.S. conceptions of community/marital property), but the same is not true of childrenwho, for example, are named on the title to the familyhome, or to the case of joint owners, where each maybe vested with rights to 100 percent of the asset.

• A secured loan, where ownership of the collateral is not yet vested. This disqualifies petitioners whoobtained loans secured by their interest in a futureasset, such as an interest in an inheritance, a trustdistribution, or shareholder dividends (includingan owner’s proportional share of retained earningsof a company). This very commonly affects theshareholder loan scenario (please note, althoughshareholder loans have historically been a commonand successful vehicle for sourcing investment funds,the shareholder loan may no longer be a viable optionif S.1501 becomes law, as discussed further below).

• A secured loan, where the collateral has a present fair market value of less than the required EB-5 investment amount. Under the new policy, USCISapparently expects to see a third party valuation of thepresent, fair market value of the collateral. Where theloan in question is a bank loan, it is typical for thisdocumentation to be available and adequate. Wherethere is a company loan or a private loan, however,the parties to a loan transaction are often willing toview a security interest as adequate notwithstandinga shortfall in present value or uncertainty as towhen the expected value will be realized. Forexample, shareholder loans are often secured bythe shareholder’s interest in future dividends or theretained earnings of the company. Private loans maybe extended based on a combination of partial securityand trust. Assets such as intellectual property, whichmay be tremendously attractive to lenders as collateral,may be extremely difficult to value. In any of thesecases, USCIS will deem the investment qualifying“capital” only up to the present value of the collateral.

• Loans specifying a purpose that is inconsistent with EB-5 investment are now suspect. This policychange was part of the IPO’s new policy statement,although it is not, strictly speaking, related to theinterpretation of “indebtedness.” It is mentionedhere because it does affect many investor petitions,particularly where the source of funds is an arms-lengthcommercial loan. The implication is thatwhere the loan documents include an agreement orrepresentation that the loan is made for a purposeother than for investment, USCIS concludes theloan transaction may have been “unlawful.”

Can Affected Pending Petitions Be Salvaged?

First, experienced EB-5 practitioners recognize that not every petition reaches the expected outcome. Waiting for adjudication with the hope of approval is a reasonable choice, particularly given the current clamor of legal objection to the new policy. USCIS noted in a previous “interactive” stakeholder teleconference on Feb. 26, 2015, that where loan proceeds are gifted to the petitioner, the funds are not subject to the limitations on “indebtedness” under the regulation. This begs the question as to whether willing borrowers and lenders can adjust the terms of their deal to conform to USCIS requirements, such as by means of loan forgiveness or gift agreement, a waiver, or a conveyance of a property right in the asset used as collateral. Many of these actions could clearly cure the stated deficiency in the source of funds, but USCIS decisions on these issues have uniformly adhered to the formality memorialized in Matter of Katigbak, holding that a petition may not be approved unless it was approvable at the time of filing. For curable cases, then, absent relief through appeal or litigation, the only reliable solution is withdrawal, reinvestment with qualifying capital, and refiling (i.e. starting from scratch).

Where to From Here?

The EB-5 stakeholder community knows from its experience with previous policy changes (i.e. tenant occupancy, 2.5 year “rule” for job creation, etc.) that it is not reasonable to assume that the IPO will change its mind or willingly ameliorate adverse impacts of its unpredictable changes of regulatory interpretation on investors. Recent criticisms of the IPO make reasonable accommodations even less likely. In light of this reality, investors and their counsel should be proactively reviewing pending petitions and the source of funds for completed investments to determine whether the new policy renders the petition (or soon to be filed petition) not approvable. Where the petition includes a child approaching age 21 (keep in mind that adjudication delays, appeals or litigation can add months and/or years to final adjudication times), it is worthwhile to evaluate whether the client’s needs are best served by a wait-and-see approach, challenging a NOID (with or without an effort to cure), appealing, litigating, withdrawing/curing/re-filing, abandoning the effort, or starting anew.

For EB-5 projects and regional centers, the new policy also warrants some proactive assessment of potential impacts. It is impossible to gauge how significant the projected spike in I-526 denials will be; if S.1501 becomes law, it will be higher still.

Offering documents should be reviewed to determine the likely expectations of the parties in the event of denial, and projects/regional centers should consider whether higher-than-expected denial rates or even more extended delays will compromise the financial viability of the project. Where the timing of final adjudications has the potential to impact project success, counsel should be consulted for guidance regarding agency practices and available options. Proactively working with investors to identify and possibly cure potential denials before adjudication can help to avert adverse impacts to the project as a whole.

Finally, it is important to recognize that new regional centers, early stage EB-5 enterprises, and new investors must be cognizant of this new policy as they take steps to bring their EB-5 financing plans to fruition. Regional centers and project developers should consider developing or modifying their offering documents to reduce the likelihood that extended adjudication delays and (in the short term) increased denial rates will impair the timely and successful execution of the business plan.

Broader Changes on the Horizon in S.1501?

The Leahy/Grassley bill currently pending in the Senate, S.1501, widely expected to provide the framework for EB-5 reform in 2015, proposes further statutory restrictions on the use of loan proceeds as capital.

Section 2(b) of S.1501 would amend Section 203(b)(5) of the INA to provide that “[c]apital derived from indebtedness” is qualifying capital only where the capital is both (a) secured by assets owned by the petitioner, and (b) “issued by a reputable banking or lending institution that is properly chartered or licensed under the laws of any State, territory, country, or applicable jurisdiction.”[4] The bill would require DHS/USCIS to verify the lender’s licensure and reputation using relevant commercial and government databases.

Section 2(c) of S.1501 would make the statutory changes effective upon enactment.[5] The primary intent of this provision appears to be to prohibit the use of private or non-institutional loans as a source of investment capital. It would entirely eliminate the use of shareholder loans and loans from family and friends, and in this respect it represents an even more dramatic shift than is represented in the new USCIS indebtedness policy. The requirements for loan security/collateral, including a prohibition on unsecured loans, appear to be in accord with the USCIS indebtedness policy.

Because the changes would be statutory, however, they would be controlling over any contrary or less restrictive interpretation of a regulation, precedent decision, or policy. Importantly, because they would take effect upon enactment, they would render statutorily ineligible even pending petitions that were filed in reliance upon prior EB-5 law and practice, including petitions that are approvable under the new USCIS indebtedness policy.

In addition to restricting the use of loan proceeds as capital, S.1501 also proposes restrictions on the use of gifts that could affect the ability of investors to fashion a “cure” for a now-defective loan by converting the loan to a gift. Under S.1501, the EB-5 statute would permit gifted funds to be used as investment capital only where (a) the donor is the petitioner’s spouse, parent, child, sibling, or grandparent, and (b) where the funds “were gifted in good faith and not to circumvent any limitations imposed on permissible sources of capital under this subparagraph.”[6] The referenced subparagraph includes not only the provisions relating to gifted funds, but the provisions relating to loaned funds and other evidentiary requirements relating to source of funds. The proposed statutory language relating to circumvention certainly raises questions about the future efficacy of fashioning a “cure” by means of loan forgiveness or gift agreement for a completed investment in an affected case.

As we assess the impact of the new indebtedness policy and make strategic decisions about how to respond, EB-5 stakeholders will want to consider the effect that proposed statutory restrictions, as drafted, would have on their available legal options. Note that the use of the words “derived from indebtedness” in the proposed statutory amendment could render moot the argument that USCIS has misconstrued the use of the term “indebtedness” in the regulatory definition of “capital.”

Additionally, the application of new statutory restrictions on even long-pending cases could render ineffective any efforts to obtain administrative or judicial relief against the harsh effects of retroactive application of new agency policies. Stakeholders may wish to consider whether legislative efforts should be directed toward amelioration of these impacts on pending petitions that were filed in good faith. For now, S.1501 should be recognized as indicative of changes that are on the horizon, but it is not yet law and must be considered as part of a shifting landscape.

Some Final Thoughts

From the perspective of EB-5 immigration counsel, it is clear that the IPO may reasonably be viewed as fickle and insufficiently guided by the EB-5 program’s goals of economic development and job creation. We will all do well to remember this new USCIS policy change as an example of how USCIS can change the rules in the middle of the game. While litigation involving the “indebtedness” policy is inevitable and encouraged, it needs to be approached carefully and smartly, so as not to further distance EB-5 law from standard expectations of the parties to commercial transactions.

1 An overview of our law firm’s initial legal analysis, co-authored with Lincoln Stone and published by IIUSA, is available on our website, www.sggimmigration.com.

On April 22, 2015, in the wake of persistent criticism during recent prior public engagements with the EB-5 stakeholder community, the USCIS Immigrant Investor Program Office (“IPO”) issued a public statement outlining its interpretation of the EB-5 regulation as it applies to the use of loan proceeds as capital. The new policy represents a significant departure from longstanding EB-5 practice. Many experienced practitioners and scholars view the IPO’s interpretation as starkly inconsistent with the text of the regulations, applicable AAO precedent decisions, binding USCIS adjudications policy guidance, and the intent of the EB-5 statute. Most experienced EB-5 attorneys view the policy as misguided and deserving of vigorous legal challenge. However, this article is not intended to provide a catalog of legal arguments for challenging its validity.[1] Instead, this article will review the likely practical impact of the new policy on present and future EB-5 investors and projects, and it will offer some practical guidance for moving forward. Finally, because the use of loan proceeds as capital may also be affected by legislation recently proposed by Senators Leahy and Grassley (“S.1501”),[2] the article offers an overview of relevant provisions therein and comments on how the proposed changes may further restrict investor options in this area.

The New “Indebtedness” Policy

The new “indebtedness” policy, as articulated by IPO, is as follows:

[P]roceeds from a loan may qualify as capital used for EB-5 investments, provided that the requirements placed upon indebtedness by 8 C.F.R. § 204.6(e) are satisfied. Under 8 C.F.R. § 204.6(e), “[c]apital means “cash, equipment, inventory, other tangible property, cash equivalents, and indebtedness secured by assets owned by the alien entrepreneur, provided that the alien entrepreneur is personally and primarily liable and that the assets of the new commercial enterprise upon which the petition is based are not used to secure any of the indebtedness.”

In order to establish an investment of capital, 8 C.F.R. § 204.6(j)(2) allows a petitioner to submit as evidence, among other items, the following:

Evidence of any loan or mortgage agreement, promissory note, security agreement, or other evidence of borrowing which is secured by assets of the petitioner, other than those of the new commercial enterprise, and for which the petitioner is personally and primarily liable.

USCIS classifies proceeds of a loan that are used for EB-5 investment as indebtedness governed by these regulatory requirements.

When using loan proceeds as EB-5 capital, a petitioner must demonstrate first that they are personally and primarily liable for the indebtedness. That is, they must demonstrate that they bear primary responsibility under the loan documents for repaying the debt that is being used to satisfy the petitioner’s minimum required investment amount.

In addition, the petitioner must demonstrate that the indebtedness is secured by assets the petitioner owns and that the value of such collateral is sufficient to secure the amount of indebtedness that is being used to satisfy the petitioner’s minimum required investment amount. Put another way, indebtedness secured by assets owned by the petitioner qualifies as “capital” only up to the value of such collateralized assets.3

How USCIS is Applying the New Policy in I-526 Adjudications

USCIS is applying the new policy retroactively by denying or declaring an intent to deny I-526 petitions, which, in view of 14-month USCIS processing times, means denial of cases that were filed more than one year ago in reliance on long-settled interpretation of the law. Additionally, for those cases that have had the opportunity to respond with substantive arguments to a notice of intent to deny, to date we have not seen the agency engage in thoughtful or meaningful adjudication responding to the points raised. Instead, we see a pattern of denial that is no more meaningful than “because we said so.” In its April 22 stakeholder engagement, the IPO underscored its unwillingness to engage in substantive discussion of the merits of the policy, declaring that it was simply a clarification of existing law because its own adjudications have been inconsistent.

Based on USCIS actions to date, it is clear that USCIS has decided to stay the course on enforcing the new policy, notwithstanding widespread criticism and the likelihood of litigation.

So, for stakeholders in the EB-5 community, the questions become where we go from here, and what does this new policy mean in practice.

What Stakeholders Should Expect

The bottom line for investors and their counsel is that a denial should be anticipated in cases affected by the change in policy.

Below, we’ll review some of the more common scenarios affected. For now, it should be understood that affected cases will receive a Notice of Intent to Deny, (“NOID”) which has a limit of 30 days for response with no possible extension, as opposed to a Request for Evidence (“RFE”) with a longer, 84-day deadline.

The significance of the shortened deadline is that it reflects the adjudicator’s view that it is highly unlikely that any additional evidence could establish the petitioner’s eligibility on the facts presented in petition. Where there is in fact additional evidence that could speak to the perceived deficiencies in eligibility, the limited 30-day response time can be very prejudicial, particularly where the petitioner resides out of the United States and language barriers are involved. It may be worthwhile to review the June 2, 2013 USCIS Policy Memorandum, PM-602-0085, outlining the circumstances under which a NOID, as opposed to an RFE, is an appropriate agency action. As an initial matter, the likelihood of a NOID underscores the need for proactive evaluation where possible.

The bottom line for projects is that they should expect a spike in denial rates that may last a year or more. Because the new policy is so prejudicial and so clearly at odds with the existing precedent decisions and published USCIS guidance, it is likely that many petitioners will pursue appeals and federal court litigation. Some investors will seek immediate exit from the project. Depending on the terms of the offering, this could result in projects being obligated to provide refunds, or it could necessitate the sourcing of replacement investors. In either event, for the project this means delay. Projects with Chinese investors are already anticipating significant delays in acquisition of conditional residence due to visa unavailability. This additional source of delay will push those dates out still further into the future. The consequences to projects of the spike in denials and resulting delays, whether they relate to availability of funds for job creation, insufficient liquidity for refunds, or long-extended conditional residence periods, will vary from project to project.

Which Investors Are Affected?

The affected classes of investors are those whose source of investment funds is as follows:

• An unsecured loan. Under the new policy, due to the absence of security for the loan which yielded cash proceeds used for EB-5 investment, these I-526 petitions are deemed to have not contributed “capital” to the new commercial enterprise.

• A secured loan, where the collateral was wholly or partially owned by someone other than the petitioner. The reasoning expressed in these decisionshas to do with the petitioner “not owning” or “onlytemporarily owning” the loan proceeds, or notplacing his or her own assets at risk. Experience todate suggests that spousal ownership of the collateral,or a portion of the collateral, is not disqualifying(apparently based on U.S. conceptions of community/marital property), but the same is not true of childrenwho, for example, are named on the title to the familyhome, or to the case of joint owners, where each maybe vested with rights to 100 percent of the asset.

34 EB5 INVESTORS MAGAZINE

• A secured loan, where ownership of the collateral is not yet vested. This disqualifies petitioners whoobtained loans secured by their interest in a futureasset, such as an interest in an inheritance, a trustdistribution, or shareholder dividends (includingan owner’s proportional share of retained earningsof a company). This very commonly affects theshareholder loan scenario (please note, althoughshareholder loans have historically been a commonand successful vehicle for sourcing investment funds,the shareholder loan may no longer be a viable optionif S.1501 becomes law, as discussed further below).

• A secured loan, where the collateral has a present fair market value of less than the required EB-5 investment amount. Under the new policy, USCISapparently expects to see a third party valuation of thepresent, fair market value of the collateral. Where theloan in question is a bank loan, it is typical for thisdocumentation to be available and adequate. Wherethere is a company loan or a private loan, however,the parties to a loan transaction are often willing toview a security interest as adequate notwithstandinga shortfall in present value or uncertainty as towhen the expected value will be realized. Forexample, shareholder loans are often secured bythe shareholder’s interest in future dividends or theretained earnings of the company. Private loans maybe extended based on a combination of partial securityand trust. Assets such as intellectual property, whichmay be tremendously attractive to lenders as collateral,may be extremely difficult to value. In any of thesecases, USCIS will deem the investment qualifying“capital” only up to the present value of the collateral.

• Loans specifying a purpose that is inconsistent with EB-5 investment are now suspect. This policychange was part of the IPO’s new policy statement,although it is not, strictly speaking, related to theinterpretation of “indebtedness.” It is mentionedhere because it does affect many investor petitions,particularly where the source of funds is an arms-lengthcommercial loan. The implication is thatwhere the loan documents include an agreement orrepresentation that the loan is made for a purposeother than for investment, USCIS concludes theloan transaction may have been “unlawful.”

Can Affected Pending Petitions Be Salvaged?

First, experienced EB-5 practitioners recognize that not every petition reaches the expected outcome. Waiting for adjudication with the hope of approval is a reasonable choice, particularly given the current clamor of legal objection to the new policy. USCIS noted in a previous “interactive” stakeholder teleconference on Feb. 26, 2015, that where loan proceeds are gifted to the petitioner, the funds are not subject to the limitations on “indebtedness” under the regulation. This begs the question as to whether willing borrowers and lenders can adjust the terms of their deal to conform to USCIS requirements, such as by means of loan forgiveness or gift agreement, a waiver, or a conveyance of a property right in the asset used as collateral. Many of these actions could clearly cure the stated deficiency in the source of funds, but USCIS decisions on these issues have uniformly adhered to the formality memorialized in Matter of Katigbak, holding that a petition may not be approved unless it was approvable at the time of filing. For curable cases, then, absent relief through appeal or litigation, the only reliable solution is withdrawal, reinvestment with qualifying capital, and refiling (i.e. starting from scratch).

Where to From Here?

The EB-5 stakeholder community knows from its experience with previous policy changes (i.e. tenant occupancy, 2.5 year “rule” for job creation, etc.) that it is not reasonable to assume that the IPO will change its mind or willingly ameliorate adverse impacts of its unpredictable changes of regulatory interpretation on investors. Recent criticisms of the IPO make reasonable accommodations even less likely. In light of this reality, investors and their counsel should be proactively reviewing pending petitions and the source of funds for completed investments to determine whether the new policy renders the petition (or soon to be filed petition) not approvable. Where the petition includes a child approaching age 21 (keep in mind that adjudication delays, appeals or litigation can add months and/or years to final adjudication times), it is worthwhile to evaluate whether the client’s needs are best served by a wait-and-see approach, challenging a NOID (with or without an effort to cure), appealing, litigating, withdrawing/curing/re-filing, abandoning the effort, or starting anew.

For EB-5 projects and regional centers, the new policy also warrants some proactive assessment of potential impacts. It is impossible to gauge how significant the projected spike in I-526 denials will be; if S.1501 becomes law, it will be higher still.

Offering documents should be reviewed to determine the likely expectations of the parties in the event of denial, and projects/regional centers should consider whether higher-than-expected denial rates or even more extended delays will compromise the financial viability of the project. Where the timing of final adjudications has the potential to impact project success, counsel should be consulted for guidance regarding agency practices and available options. Proactively working with investors to identify and possibly cure potential denials before adjudication can help to avert adverse impacts to the project as a whole.

WWW.EB5INVESTORS.COM 35

Finally, it is important to recognize that new regional centers,

early stage EB-5 enterprises, and new investors must be cognizant

of this new policy as they take steps to bring their EB-5

financing plans to fruition. Regional centers and project developers

should consider developing or modifying their offering

documents to reduce the likelihood that extended adjudication

delays and (in the short term) increased denial rates will impair

the timely and successful execution of the business plan.

Broader Changes on the Horizon in S.1501?

The Leahy/Grassley bill currently pending in the Senate, S.1501, widely expected to provide the framework for EB-5 reform in 2015, proposes further statutory restrictions on the use of loan proceeds as capital.

Section 2(b) of S.1501 would amend Section 203(b)(5) of the INA to provide that “[c]apital derived from indebtedness” is qualifying capital only where the capital is both (a) secured by assets owned by the petitioner, and (b) “issued by a reputable banking or lending institution that is properly chartered or licensed under the laws of any State, territory, country, or applicable jurisdiction.”[4] The bill would require DHS/USCIS to verify the lender’s licensure and reputation using relevant commercial and government databases.

Section 2(c) of S.1501 would make the statutory changes effective upon enactment.[5] The primary intent of this provision appears to be to prohibit the use of private or non-institutional loans as a source of investment capital. It would entirely eliminate the use of shareholder loans and loans from family and friends, and in this respect it represents an even more dramatic shift than is represented in the new USCIS indebtedness policy. The requirements for loan security/collateral, including a prohibition on unsecured loans, appear to be in accord with the USCIS indebtedness policy.

Because the changes would be statutory, however, they would be controlling over any contrary or less restrictive interpretation of a regulation, precedent decision, or policy. Importantly, because they would take effect upon enactment, they would render statutorily ineligible even pending petitions that were filed in reliance upon prior EB-5 law and practice, including petitions that are approvable under the new USCIS indebtedness policy.

In addition to restricting the use of loan proceeds as capital, S.1501 also proposes restrictions on the use of gifts that could affect the ability of investors to fashion a “cure” for a now-defective loan by converting the loan to a gift. Under S.1501, the EB-5 statute would permit gifted funds to be used as investment capital only where (a) the donor is the petitioner’s spouse, parent, child, sibling, or grandparent, and (b) where the funds “were gifted in good faith and not to circumvent any limitations imposed on permissible sources of capital under this subparagraph.”[6] The referenced subparagraph includes not only the provisions relating to gifted funds, but the provisions relating to loaned funds and other evidentiary requirements relating to source of funds. The proposed statutory language relating to circumvention certainly raises questions about the future efficacy of fashioning a “cure” by means of loan forgiveness or gift agreement for a completed investment in an affected case.

As we assess the impact of the new indebtedness policy and make strategic decisions about how to respond, EB-5 stakeholders will want to consider the effect that proposed statutory restrictions, as drafted, would have on their available legal options. Note that the use of the words “derived from indebtedness” in the proposed statutory amendment could render moot the argument that USCIS has misconstrued the use of the term “indebtedness” in the regulatory definition of “capital.”

Additionally, the application of new statutory restrictions on even long-pending cases could render ineffective any efforts to obtain administrative or judicial relief against the harsh effects of retroactive application of new agency policies. Stakeholders may wish to consider whether legislative efforts should be directed toward amelioration of these impacts on pending petitions that were filed in good faith. For now, S.1501 should be recognized as indicative of changes that are on the horizon, but it is not yet law and must be considered as part of a shifting landscape.

Some Final Thoughts

From the perspective of EB-5 immigration counsel, it is clear that the IPO may reasonably be viewed as fickle and insufficiently guided by the EB-5 program’s goals of economic development and job creation. We will all do well to remember this new USCIS policy change as an example of how USCIS can change the rules in the middle of the game. While litigation involving the “indebtedness” policy is inevitable and encouraged, it needs to be approached carefully and smartly, so as not to further distance EB-5 law from standard expectations of the parties to commercial transactions.

1 An overview of our law firm’s initial legal analysis, co-authored with

Susan Pilcher

Susan L. Pilcher is a senior attorney with the EB-5 practice group at Stone Grzegorek & Gonzalez LLP in Los Angeles. Her practice focuses on business and investment immigration. Pilcher counsels and represents clients in a diverse range of investment-related immigration matters, ranging from working with entrepreneurs on nonimmigrant status and long-range strategic planning, to preparing I-526 and I-829 petitions and template filings, to guiding developers in the preparation of investment offerings suitable for EB-5 funding, developing I-924 regional center applications, and counseling regional centers and developers on ongoing compliance issues.

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